96-127
Response
September 27, 1996
Request
XXXXX
Re: Application of Utah Sales and Use Tax Act to Cellular Phones
Transferred as Premiums with Taxable Cellular Air time Contracts.
Dear Commissioners:
On behalf of XXXXX (“XXXXX”), we respectfully request a ruling from the
Utah State Tax Commission (the “Tax Commission”) on the proper application of
the Utah Sales and Use Tax Act to telephones which XXXXX transfers, at a
discount or without additional charge, to customers who purchase cellular Air
time contracts.
FACTS
The Federal Communications Commission licenses XXXXX as a cellular
carrier to provide retail domestic public cellular telecommunication service in
selected areas of Utah. As part of this
service, XXXXX sells cellular Air time contracts to customers. Customers pay for these contracts on a
monthly basis, and the amounts paid are taxable under Utah Code Ann.
59-12-103(1)(b).
When a customer purchases a contract, XXXXX will sometimes provide a
telephone to the customer at a substantial discount or without charge. XXXXX does this only when the customer signs
up for cellular service, in what is often termed a “bundled transaction.” At the end of the contract term, the
customer retains the phone without any further charge. The bundled transactions encourage many
customers to purchase taxable Air time contracts who otherwise would not do
so. XXXXX charges sales tax to the
customer on the total price charged, including any amount charged for the
telephone. If XXXXX ever sells a phone
without an accompanying Air time contract, the phone is sold without a
discount, and sales tax is charged.
In addition to the contracts XXXXX sells itself, it also sells
contracts through agents, usually retail stores, to gain access to wider
distribution channels. The agents
follow the same procedures with their phones as XXXXX, as described above, and
the agents receive a commission from XXXXX for each “bundled transaction.”
ISSUES
1. When XXXXX, or its agent,
sells a taxable cellular Air time contract to a customer and, in a “bundled
transaction,” transfers a phone to the customer at a discount or without
additional charge, what is the base on which XXXXX should charge sales tax to
the customer?
2. When XXXXX, or its agent,
purchases a phone which it then transfers at a discount or without additional
charge to a customer who signs a taxable cellular Air time contract, is the
purchase of the phone by XXXXX a sale for resale and thus exempt from sales and
use tax?
DISCUSSION
Sales tax on charges to customers.
When XXXXX customers purchase a cellular Air time contract and receive a
phone at a discount or at no additional charge, the customers should only be
required to pay sales tax on the net amount due. Utah Code Ann. § 59-12-103 imposes a sales tax on the “amount
paid or charged” for sales of tangible personal property and intrastate
telephone service. “Purchase price”
excludes cash discounts. The applicable
Tax Commission rule states that: “[i]f a retailer agrees to furnish a free item
in conjunction with the sale of an item, the sales tax applies only to the net
amount due.” Utah Admin. R.
R985-19S-68.G. (Rule 68G). In its bundled transactions, XXXXX agrees to furnish
a phone, at a discount or at no additional charge, in conjunction with a
taxable cellular Air time contract.
These transactions fit squarely within Rule 68G, and XXXXX's customers
should pay sales tax only on the net amount due. If the phone is sold at a discount, the net amount due will be
the price of the phone to the customer plus the monthly service charge. If the phone is provided without an
additional charge, the net amount due is the monthly service charge only.
Sales or use tax on XXXXX's purchase of the phones. XXXXX should not be required to pay sales
and use tax when it purchases phones from manufacturers or distributors because
XXXXX is purchasing the phones for resale.
It is clear that items purchased for resale are
exempt from sales and use tax under Utah Code sections 59-12-103(13)(a)
and 59-12-104(28). The Tax Commission
has specifically defined when premium items, like the phones, are purchased for
resale. If the premium item is to be
given away with a taxable item in a bundled transaction, it is purchased
for resale, and no sales or use tax is due until the sale to the ultimate
customer. Utah Admin. R. R865-19S-68.B.
(Rule 68B). If the premium item is to
be given away with a non-taxable item, it is not purchased for resale,
and sales tax must be paid. Id.
R865-19S-68.C. (Rule 68C). The rule reads as follows:
B. When a retailer making a retail sale of
tangible personal property which is subject to tax gives a premium
together with the taxable personal property sold, the transaction is regarded
as a sale of both articles to the purchaser, provided the delivery of
such premium is certain and does not depend upon chance.
C.
Where a retailer is engaged in selling tangible personal property which
is not subject to tax and furnishes a premium with the property sold, the
retailer is the consumer of the premium furnished. Id. R865-1-9S-68.B.&C.
(emphasis added).
There is a clear distinction based on the taxability of the item for
which the premium is given. Rule 68B applies to the clothing store that sells
two suits for the price of one, or the furniture store that sells a recliner at
half-off with the purchase of a bed, because the suit and the bed are
taxable. Rule 68C applies to the bank
that gives away a free toaster when a customer opens a checking account because
the opening of the account is not taxable.
The cellular phone that XXXXX provides its customers is given only with
a taxable cellular airtime contract.
Therefore, the phones fall within Rule 68B, and no sales tax should be
due when XXXXX purchases the phones from the manufacturer.
Rule 68 explicitly addresses premiums given with the sale of “tangible
personal property,” or the sale of an “item.” See Id.
R865-1-9S-68.B.&G. It is clear,
however, that the same rationale applies to tangible personal property provided
as an integral part of a taxable service when a bundled transaction is
involved. Cf Rule R865-19S-59 (where
paint sold to a body shop is exempt because it becomes a component of the
taxable repair service).
Accordingly, we respectfully request that the Tax Commission issue an
advisory ruling that (a) XXXXX's customers who purchase a cellular airtime
contract and telephone in a bundled transaction must only pay sales tax on the
net amount due; and (b) XXXXX is not required to pay sales or use tax when it
purchases the phones from manufacturers or distributors.
Prior rulings of the Commission.
We have previously discussed this matter with XXXXX, a Tax Policy
Analyst at the Commission. She was kind
enough to provide us with three prior rulings of the Commission in this area,
dated XXXXX and XXXXX. All of these
rulings provide that a phone, purchased for resale is exempt. All of these rulings provide that sales tax
must be collected from the ultimate customer on the “entire contract price.”
The rulings further provide that the phones may be purchased tax free
if the “entire contract price” includes a charge for the phone and the
service. There is no stated requirement
that the charge for the phone be separately stated. If, on the other hand, the “entire contract price” covers only
the service, and the phone is given away as a premium, the rulings require the
agent or the service supplier to pay sales or use tax on its purchase of the
phones.
We believe this distinction is unworkable in practice and also
disregards Rule 68B. For example,
assume a cellular phone costs XXXXX $100.
Assume further that XXXXX is willing to sell a year of service and a
phone for $300.
1. If XXXXX sells a $250 phone contract and
provides a phone for $50, XXXXX may purchase the phone tax free and must
collect sales tax on $300. The
Commission will receive total tax of about $15.
2. Similarly, if XXXXX sells the phone contract
for $299 and provides a phone for $1, XXXXX may purchase the phone tax free and
must collect the sales tax on $300. The
Commission will receive total tax of about $15.
3. Under the rulings as we understand them,
however, if XXXXX sells the phone contract for $300 and provides a free phone,
XXXXX must still collect sales tax on $300, but must pay sales tax of
approximately $5 on its purchase of the phone.
The Commission will receive total sales tax of approximately $20 on a
transaction that is economically identical to situations 1 and 2.
The sales tax consequences of the transaction should be dependent on
the economic realities of the situation--not on the marketing strategy of any
particular salesman. The Commission is
entitled to tax on $300, no more, no less, regardless of any arbitrary
allocation made by a salesman solely for promotional purposes.
This is clearly the result required by Rule 68. Part B. clearly
provides that when a retailer making a retail sale of an item subject to tax
(the phone service) gives a premium (the phone) together with the item sold,
the transaction is regarded as the sale of both articles to the purchaser,
provided the delivery of such premium (the phone) is certain and does not
depend upon chance. As noted above, whether the taxable item is a taxable service
or taxable personal property should make no difference.
None of the taxpayers requesting the earlier rulings mentioned Rule 68
or discussed its application to this fact situation. We believe the earlier rulings should be revised in light of Rule
68.
We appreciate your attention to this matter. Once you have had a chance to review this request, we would
appreciate the opportunity to meet with you to respond to any questions or
concerns you may have.
Respectfully submitted,
XXXXX
XXXXX
Advisory opinion - Application of sales tax to sales
of cellular phone equipment and service contracts
Dear XXXXX,
We
have received your request for an opinion as to the liability for sales tax on
sales of cellular phone equipment and services contracts. We find as follows:
The
cellular phone equipment described in your request letter is tangible personal
property, and the sale of cellular phone equipment is subject to sales
tax. §§59-12-102 and 103 Utah Code Ann. With certain exceptions such as charges for
interstate calls, sales of cellular air time contracts and charges for service
under those contracts are also taxable as telephone service. §59-12-103 Utah Code Ann. When either of these taxable items are sold separately,
the sales tax is calculated on the sales price paid by the customer. However, your request concerns the various
types of transactions that your client enters which “bundles” phone equipment
and air time contracts. Under these
transactions, the customer may purchase a package in which the cellular phone
equipment is sold at a discount or given away at no cost.
When
taxable items are sold together in a “bundled transaction,” the entire sales
price is subject to sales tax. Utah
Admin. Rule R865-19S-68 (B). Therefore,
when the sale of cellular equipment is bundled with the sale of cellular
service, the total amount paid by the customer is subject to sales tax, even if
one of the items is sold at a discount.
In this case your client may purchase the phone equipment tax free under
the resale exemption.
When
taxable items are bundled together and one of the items is given away as a gift
or incentive, the donor, as the final consumer of the item given away (as a
premium or otherwise), is liable for the sales tax on the vendor’s cost
of the item. Utah Administrative Rule
R865-19S-68 (A) (emphasis added). The
vendor may not, as you suggest, purchase an item tax free for resale if the
item is to be given away at no cost. If
an item is purchased by a retailer under the resale exemption, but not resold,
the retailer is liable for the tax.
§59-12-107 (6) Utah Code Ann. To
do otherwise would allow the property to escape taxation.
If
your client or your client’s agents purchase phone equipment tax free for
resale, then convert the equipment to their own use or give the equipment away
at no charge as an incentive to encourage a customer to enter a service
agreement, your client or its agent must report and remit sales tax on the
purchase price of the item.
Although
you did not ask about tax situs (or tax jurisdiction), we have received
questions about this from other cellular service companies. We take this opportunity to offer your
client the following guidelines . For
sales of equipment delivered to or installed in a fixed location in Utah, that
location determines the point of sale tax situs and tax rate applied to charges
for the equipment. For other taxable
charges (such as air time charges), the tax situs shall be the service
location. By “service location” we mean
the business location from which the cellular user is employed, dispatched or
based, or, in the case of non-business accounts, the residence address of the
user. The billing address may be used
if it fairly represents the service location as that is defined here.
Thank
you for your thoughtful research on this issue. We are reviewing R865-19S-68 with an eye toward clarifying it
through amendment to avoid confusion in the future.
In the meantime, please let us know if you have other
questions.
For
the Commission,
Alice
Shearer,
Commissioner